Please answer all questions (1a, 1b, 1c, 1d). I can\'t award credit if all quest

Question

Please answer all questions (1a, 1b, 1c, 1d). I can't award credit if all questions are not answered so please follow instructions. If you are writing these answer please write clearly in print.

Question 1

La Quinta Motor Inns developed a computer model to help predict the profitability of sites that are being considered as locations for new hotels. If the computer model predicts large profits, La Quinta buys the proposed site and builds a new hotel. If the computer model predicts small or moderate profits, La Quinta chooses not to proceed with that site (Extracted from S. E. Kimes and J. A. Fitzsimmons,Selecting Profitable Hotel Sites at La Quinta Motor Inns, Interfaces, Vol. 20, March April 1990, pp. 12 20).This decision-making procedure can be expressed in the hypothesis-testing framework. The null hypothesis is that the site is not a profitable location. The alternative hypothesis is that the site is a profitable location.

1a. Explain the risks associated with committing a Type I error in this case.

1b. Explain the risks associated with committing a Type II error in this case.

1c. Which type of error do you think the executives at La Quinta Motor Inns are trying hard to avoid? Explain.

1d. How do changes in the rejection criterion affect the probabilities of committing Type I and Type II errors?

Explanation / Answer

Answer to 1a)

Type I error is defined as rejecting a true null . This means that the site is not profitable , but you end up considering it profitable . This type of error is labeled as Type I

The risk involved in this are as follows;

.

Answer to part 1b.

Type II error , is when the null hypothesis is wrong, but you end up accepting it or you fail to reject it. This means that the site actually is profitable , but you end up considering it non-profitable.

The risk associated with this type of error are as follows:

.

Answer to part 1c)

It is definitely yes important to avoid type I error in this case. Because if the company ends up investing in a wrong site , in a site that is not profitable , it will immediattely affect the finanical state of the company , and will or might lead to huge captial loss. It is better to face opprtunity cost in terms of type II error , than to face financial loss in terms of Type I error. Thus the company's main aim would be to avoid type I error.

.

Answer to part d)

If type I error is decreased, type II error increases and vice versa.

Now if the rejection criteria , is changed in a manner that it increases the rejection region , type I error will increase and type II error surely decreases

But if the rejection region is decreases, it will cause a decrease in type I error , and an increase in type II error.

Based on the severity of each type of errors , the company needs to decide which error must it aim to reduce and thereby decide upon the rejection crtieria.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.